YOU’RE IN SHAPE FOR SUMMER

Happy Summer! Great weather is here, and with pandemic restrictions largely lifted, we are in a great position to fully enjoy what seems like the shortest Canadian season. In that spirit, we will keep this month’s blog brief.

Just in time for the season that also seems calmest, the markets, interest rates and inflation have all settled down to at least a degree. And, in the past two months we have spoken with the vast majority of our clients, confirming they are indeed comfortable with our ongoing strategy. Nevertheless, it’s been an eventful few weeks as our portfolios and the general markets have demonstrated some resilience in the face of high inflation readings, weak economic signals, interest rate hikes, and an earnings season that validates our focus on quality, as some businesses are faring much better than others.

How well is our strategy working? Here is the bottom line: the S&P 500, which we consider to be the best indicator of the markets overall, is down approximately 15% this year, after rallying 7% in July. In contrast, our typical balanced portfolio is down 5% with both the equity and fixed income components outperforming by double digits. Despite all of the volatility, our clients’ ability to meet their goals is as healthy as it was one year ago.

There is further reason for optimism, in the form of this key indicator that no one seems to be talking about: in the middle of June, a ten-year bond in the United States was paying 3.48%. Now it is paying only 2.55%. That is a substantial drop in just a short period of time, an indicator that interest rates and inflation may be stabilizing, which is good for all asset classes.

Two and three months ago, as mentioned here for example, we were shopping. Picking out good companies at good prices before the markets started to recover while also locking in higher yields on bonds and other fixed income investments. We are always vigilant, and will continue to shop prudently if there is further volatility. For the moment, we are on the sidelines, watching asset prices recover and continuing to look for mispriced assets.

DATA TIME

I am writing this during the week of July 25, in which second quarter corporate earnings will be released by some very large companies, including Alphabet, Amazon and Visa. As well, the US Federal Reserve raised interest rates by 0.75%, the second consecutive such increase, which was in line with expectations. Markets responded well, as there appears to be growing comfort that policy makers in the US are catching up to inflation.

These are lagging indicators: they tell us what has already happened, which the market priced in with its selloff earlier this year. Nevertheless, earnings reports give us good insight into which companies are performing better than others and of course tell us whether earnings are higher or lower than expected. If economic growth has in fact been slowed, inflation should fall, meaning that central banks are getting control of it. This, in turn, means that the pace of rate increases could slow faster than expected, and that rate cuts could be made at some point next year.

What does it all mean?

ON TRACK

We will continue to be very prudent through the remainder of the year, given tightening financial conditions and a deteriorating economic backdrop. But, that is a rather ordinary concern that tends to come and go, just as economic and market cycles do. Our financial plans are built with this in mind.

We are most comforted by the decline in longer-term inflation expectations. That is a development that leaves us more reassured about the longer-term prospects of all asset classes and our ability to keep your planning on track with a margin of safety.

Regardless of all these factors, our strategy is keeping us firmly on track and will continue to do so.

Enjoy some relaxation time and this great weather!

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We don’t speak jargon. We’re all about uncomplicating your life, so we speak plain English. If there is someone you care about – someone who would appreciate this simple and straightforward approach – please feel free to share this message with them or put us in touch.

Want to discuss any aspect of this month’s blog, or any other issue on your mind? Have a story idea? I am always happy to receive your call or email.